This week, winter storms and frigid temperatures left normally temperate regions frozen in their tracks. In typically arid Texas, highways were choked with snow and the ill-equipped power grid experienced massive outages, forcing the state to resort to rolling blackouts for days on end. Across the Atlantic, typically mild winter locales such as Athens and Istanbul were also blanketed by snow and faced similar issues.
These bizarre events – which scientists have widely attributed to climate change – add to the mounting occurrences of extreme weather that have grown increasingly common in recent years. They also punctuate the fact that no real estate investment is immune to growing climate risks.
That a Texas blizzard dominated headlines this week is of no small consequence to institutional real estate investors. Dallas was the most active commercial real estate market in the US last year, according to the transactions house Real Capital Analytics, bolstered by growth in the multifamily and industrial sectors. It was also the recipient of major covid-era corporate relocations from Silicon Valley giants Oracle and Hewlett Packard. The state capital of Austin, a long-time target for apartment investors, has also boomed during the pandemic, seeing the most declared professional relocations between April and October, as tracked by the social media platform LinkedIn.
In addition to being cheaper alternatives to traditional hubs such San Francisco and New York, which have seen some of the biggest outmigration of residents during the pandemic, these southern markets have benefited from significantly less volatile weather in recent years. A report released by the Urban Land Institute and Heitman last year finds that real estate investors are increasingly wary of coastal areas, for example, and are applying more scrutiny overall to market-level environmental threats and preparedness. Insurers, meanwhile, are reassessing their ability to cover properties in regions prone to flooding, high winds and wildfires – a list that is increasingly hard for most property markets to avoid.
Last year alone, a record 12 named tropical storms reached the US and millions of forest acres burned along the West Coast in a wildfire season that tallied five of the six most destructive blazes in California history. Meanwhile, the Midwest sustained storm flooding that caused $12.6 billion of damage, according to the advisory group Aon. Inland Texas had been unscathed by such calamities in recent years – until now. With millions left without heat or power, and whole metro areas brought to a halt, this week’s blizzard has exposed deep flaws in the climate risk assumptions about some of North America’s fastest growing real estate markets.
The issue is by no means unique to North America, as the unexpected snowfall and ensuing power outages in southern Europe this week also demonstrates. But more likely than not, property investors in these markets were not factoring in this type of weather-related disruption into their due diligence, and now face consequences for being ill-prepared for such an occurrence.
Due diligence practices will therefore need to change, because the growing number and severity of extreme weather events globally will require all investors to assume a higher degree of unpredictability into their underwriting going forward, regardless of where their assets are located. As this week’s events in the US and southern Europe show, there is no safe haven from climate risk.